Apple to prepay $3.9B to ensure display supply

El Segundo, Calif. — Apple Inc. is spending $3.9 billion to guarantee availability of advanced liquid-crystal display (LCD) panels for its iPad and iPhone lines, reports IHS iSuppli.

Tom Cook, chief operating officer at Apple, stated during Apple’s first-quarter financial call that the company had executed long-term supply agreements with three vendors, according to IHS iSuppli. These agreements entailed about $3.9 billion in inventory component prepayments and capital expenditures during a two-year period.

IHS iSuppli believes the vendors are likely to be LG Display, Sharp Corp. and Toshiba Mobile Display, and the agreements would involve the supply of Apple’s retina display used in the iPhone and iPad. The retina display uses advanced in-plane switching (IPS) and low-temperature polysilicon (LTPS) technology that provides extremely high resolutions in small displays by using pixels that are smaller than the human eye can perceive, said IHS iSuppli.

“In the era of the iPad and iPhone, the user interface — particularly the display and touch screen — has become the most critical competitive differentiator for tablets and smart phones,” said Vinita Jakhanwal, director for small and medium displays at IHS, in a statement.

“With sales of smart phones booming, and a flood of new entrants into the tablet market this year, competition among original equipment manufacturers (OEMs) for available supplies of high-end small and medium displays has reached a fever pitch, straining availability of critical types of displays. Because of this, Apple has moved to invest some its enormous cash reserve in securing the supply of advanced displays,” he added.

In 2010, Apple spent nearly $2 billion on displays for its iPad and iPhone lines, sourcing LCD panels from LG Display, Samsung Electronics, Sharp and Toshiba Mobile Display, according to IHS iSuppli. However, Apple’s latest move indicates that it may provide money that the display manufacturers can use to invest in the production of IPS and LTPS LCD panels instead of simply purchasing displays from suppliers, said IHS.

Jakhanwal said this also means Apple has a major claim to the global output of IPS LCD and LTPS LCD panels, which could “have major implications for all competitors participating in the smart phone and tablet market.” Contributing to the potential supply/demand scenario is limited production capacity for both technologies.

The major alternative to IPS wide viewing and power saving features in smart phones currently is the active matrix organic light- emitting diode (AMOLED) display used in many Android operating system-based models, said IHS iSuppli. Currently, Samsung Mobile Displays and LG Display are the only sources for AMOLED panels with Samsung accounting for the majority of shipments, according to the market research firm.

As a result AMOLEDS are in a critical shortage situation. “With Apple trying to invest in assuring IPS supply, and Samsung Electronics having preferential access to small- and medium-sized AMOLED supply, the rest of the smart phone makers are caught between the two giants,” Jakhanwal stated. “This has left other OEMs to resort to other technologies when it comes to advanced displays, giving Apple and Samsung a huge edge in product differentiation in a highly competitive market.”